October is shaping up to be a great month for the U.S. dollar. Month-to-date, the U.S. Dollar Index is up 3.4%, a sizable move for the world's most important currency. October's rally has pushed the buck into positive territory for the year, and to the highest level since February.
A Brexit-fueled slide in the British pound and growing expectations of a Federal Reserve rate hike in December are the two biggest drivers of the latest jump in the Dollar Index.
The dollar now finds itself near key levels that could turn out to be extremely meaningful not just for the currency itself, but for broader financial markets. Currently, the Dollar Index is trading at 98.6, less than 2% below the multiyear high of 100 set last year.
US Dollar Index
The Dollar Index ticks into the green for the year after surging 12.8% in 2014 and 9.3% in 2015.
"If it can break above that level in a meaningful fashion, it is going to be incredibly bullish for the dollar on a technical basis," wrote Matt Maley, equity strategist for Miller Tabak, in a recent research note.
Though Maley doesn't consider a Dollar Index "breakout" above 100 his base-case scenario, the fact that the index is so close to this key level means investors should at the very least be prepared for another big increase in the dollar.
Impact On Currency ETFs
In the ETF world, the most obvious impact from a dollar breakout will be on currency ETFs. The $863 million PowerShares DB US Dollar Index Bullish ETF (UUP) (which tracks the U.S. Dollar Index), and the $217 million WisdomTree Bloomberg US Dollar Bullish Fund (USDU) (which tracks the broader Bloomberg Dollar Index), both stand to benefit from gains in the greenback.
Certain ETFs tied to single-currency pairs will also benefit, such as the ProShares UltraShort Euro ETF (EUO) and the ProShares UltraShort Yen ETF (YCS), which provide 2x-leveraged exposure to the dollar against the euro and yen, respectively.
On the flip side, most of the other currency ETFs on the market provide investors with short dollar exposure and would likely get hit hard if the dollar continues to rally.